Saturday, June 20, 2009

Positive cash flow, does it exist?

I get tons of calls and emails from people looking for a "deal" on a beach property that will generate positive cash flow and offer a get-away spot for occasional trips to Cocoa Beach or Cape Canaveral. There is a pretty narrow set of requirements for realization of positive cash flow. Let's do some simplified math to help us narrow our search. Say we're looking for a condo in the $200,000 range. We'll assume a 30% down payment (Fannie Mae requirements for 2nd home condos) on a 30 year mortgage at 5.5%. Our fixed monthly costs will be (estimates but close to reality);

property taxes__ 250
condo fees_____ 350
utilities________ 130
insurance_______ 70

That means on this condo the buyers will need to net $1594 per month after management for all 12 months of the year. Subtract a couple of months for personal use and the net bumps to $1913 a month necessary to break even. Without even looking for examples I can tell you that there is not a single $200,000 condo anywhere on the beach that will bring $1913 per month rent year round even if it were possible to carve out 2 months for personal use and rent the other 10 months. Does this mean there are no cash-flow possibilities? No. If there were no mortgage in our example the numbers would slide into the realm of possibility but we're still faced with the impossible task of renting 10 months while carving out two months for our own use. In this case, with no mortgage, the only realistic possibility is to not use the unit ourselves and have a long-term renter paying at least $800 per month, a very feasible scenario.

The biggest (but often invisible if you don't ask) fly in the ointment for investors exploring condo investment is rental restrictions. I have written about this before. In a nutshell, Cocoa Beach and Cape Canaveral, unlike most Florida coastal communities, have very few condos that allow weekly rentals. Most here restrict rentals to at least one month and some have as much as a one year minimum rental. Even with a one month minimum, an owner is faced with the daunting task outside of the main snowbird season of January through April of finding tenants who want to rent for at least one month. Our summer and fall guests are primarily vacationers who are here for one or two weeks. That reduces the options to finding a long-term renter which kills the idea of occasional personal use of the unit. The obvious best solution to this dilemma is a weekly rental unit.

Let's explore the same scenario as above but with a weekly rental unit in the $200,000 range like Chateau, Ola Grande or Cape Winds. The units that are selling in this price range in these complexes are renting in the $600 to $900 per week range. It quickly becomes obvious that the no-mortgage scenario is only going to require about 50% occupancy to net enough after-management cash to break even. With no mortgage, positive cash flow is a very real possibility with halfway decent occupancy. By the way, a mortgage is not possible in most of these weekly rental complexes. Expect to pay more (20 to 40%) for good short-term rental management. Good long-term management can be had in the 10 to 12% range. If an owner is able to and does their own management the possible returns for weekly rentals become quite attractive. The other obvious plus of the weekly rental units is that owners can chop out a few weeks here and there for themselves without destroying the income stream.

For buyers who don't want or need personal use of the unit, one other way to tilt the odds in their favor is to find a unit at a price far below the assumed $200,000 purchase price. In our first scenario, dropping the purchase price significantly assuming the same desirability of the unit, the numbers begin to shine a little brighter even with a mortgage and a long-term renter. There are some other tweaks that will change the numbers like condo fees and utilities but those differences aren't big enough to change the tone of our hypothetical purchase.

As a potential condo buyer, your takeaways here are;

  • All other things being close to equal, a well-managed weekly rental unit will always generate more income and offer greater flexibility for personal use.
  • If you do stick with longer minimum rental buildings, don't think that because January through April rents and demand are high that you'll be able to find monthly renters the rest of the year. If you do, consider yourself lucky.
  • Be realistic with your expectation. Only considering positive cash flow scenarios might mean never using your unit yourself or could have you looking at units you don't like. The benefits of owning a condo that you use occasionally that is slightly negative on cash flow might make sense.
  • Ask your buyer's agent about rental restrictions. Not all of them will go out of their way to tell you why your dream of income/personal use won't work in many of our complexes. Many of them have never stopped to even think about the implications of restrictions.
  • And lastly, if you don't have to have the income, you'll probably enjoy your time here more in a longer-term building without all the transients. It's all about what you want and need.
"I merely took the energy it takes to pout and wrote some blues."
________Duke Ellington

Thursday, June 18, 2009

Putting right along

Photo above was taken from the top floor of Xanadu looking south towards downtown Cocoa Beach. The Pig and Whistle Pub is the brown roof building in the dead center of the shot. The white buildings on the river in the top left are Harbor Isles with Merritt Island off in the distance.

Sorry for the lag between posts as I've been traveling. We are back on the regular schedule now.

Action in the Cocoa Beach and Cape Canaveral condo market has been strong so far this month with 46 accepted contracts since June 1. Fourteen of those were short sales and a few others were foreclosures. Only 2 of the units were asking above $500,000. With sales at Meridian winding down to the last few developer units I expect the over-$500,000 sales to drop off the cliff. Of the fourteen condo sales over $500,000 so far in 2009, eight were Meridian units. That leaves us with a rest-of-the-market sales rate of one half-million-dollar-plus condo per month. That's with an inventory this morning of 97 units, eight years worth not even factoring in the shadow developer inventory which will easily swell that number by 50% or more. Not good news for the luxury condo market.

We have had an impressive 25 closed condo sales so far in June, two over $500,000, both at Meridian. Twenty of the thirty sold for less than $230,000. That paints a pretty clear picture of our market. If I gave any credence to median price numbers that metric would look horrific year over year. The bright spot in all this is the fact that so many units are selling despite significant hurdles with financing and the difficulty of bringing a short sale to the closing table.

Only one single family home has closed this month in our market, a direct Banana River home on Jack Drive that closed for $450,000. Another three went under contract since the 1st.

Of the sales of note so far this month, my favorite has to be the Fountain Cove 3rd floor unit that closed Monday for $185,000. I presented an offer exactly one year ago today on this unit for $190,000 when it was listed for $243,500. Not only did the listing agent rudely dismiss the substantiating comps we included with our offer, she actually called back after the seller refused to counter to deliver a second message from the sellers, "Tell them to go buy another condo." We did. You can read the entire sadly funny exchange here. Others of note included;

  • A five year old top floor, 1918 sq.ft. Solana on the River closed for $215,000 as a short sale.
  • A 2 year old 3/2 Puerto del Rio in Cape Canaveral with 1862 sq.ft. sold for $205,000 as a short sale.
  • A direct river River Bend 3/2 with 2050 sq.ft. and a boat slip in south Cocoa Beach was stolen for $260,000.

MLS inventory June 18, 2009 Cocoa Beach & Cape Canaveral

Condos, all prices_____681
over $500,000_________97 - 14 sold since New Year's Day
Single family homes____102
over $500,000_________39

“If you can't make it good, at least make it look good.”
_________________Bill Gates

Tuesday, June 02, 2009

Semi-charmed life

Big fish in the surf at sunrise in south Cocoa Beach. The office can wait.

We are seeing more and more condo sales fail because of financing-related issues. With Fannie Mae's new rules related to association health, many condo complexes are missing the cut for Fannie Mae loans. As these loans represent a sizable chunk of the available condo financing, the impact is significant. The new scrutiny includes review of reserves, number of owners past due on condo fees and percentage of units owned by a single entity. I am aware of buildings that are immediately disqualified because of the latter. Another fly in the ointment is the new appraisal rule mandating no direct contact between the lender and the appraiser. Good intentions but the result has been less than impressive. Instead of experienced local appraisers who understand our market and who receive the entire appraisal fee enabling them to spend the time necessary to do an accurate appraisal, the man or woman doing the appraisal now is often the low bidder who is receiving at times 1/3 of the fee,(2/3 going to the appraisal management company) and may be driving across the state to do the job. For the fee being collected, there is not a lot of incentive to research the difference between a weekly rental building and a one-year-minimum rental building or the significance of the higher value of a building with a recent major concrete reno project and one staring at a major project in the near future. Think the low bidder will consider other good comps when it's pointed out that the ones he used aren't really comparable. Not happening.

There are a few takeaways here;
  • Buyers, your financing may not happen no matter how shiny your credit report is.
  • The appraisal will likely not represent a true picture of the condo's worth (could be high or low), although a buyer may use a low appraisal to his benefit in renegotiating a lower price post-contract.
  • Cash is no longer king. It is ruler of the universe. Sellers, you must treat cash offers as golden because they may be the only way you will sell your unit in this environment.
Time for predictions. The biggest question on everyone's mind is, when will the market bottom? I can't say but we have already seen sizable upticks in selling prices in a few complexes. That doesn't mean another distressed seller or bank-owned unit won't surface in these complexes. It does indicate that we are sniffing around the bottom when there are buyers willing to pay more than the previous low price. With prices now at pre-runup levels, the amount of downside is reduced enough that, barring total economic collapse, the "bottom" is close enough that risk levels are tolerable in some buildings and complexes. I am talking about existing buildings with no developer-owned units. This does not apply to any of the new luxury units. I expect more price erosion, possibly significant, in the over $500,000 condo market with the most pain in the brand new buildings. I would not pay today's asking price in any new building in Cocoa Beach or Cape Canaveral.

If you are looking for a very specific type of unit or in a specific building or area, waiting for the bottom could turn into an exercise in frustration. You need to to recognize when you've found the perfect unit and do your best to negotiate the best price possible rather than hoping to find the perfect unit at the exact market bottom. Example: if you wanted to buy a unit in Mar Bleu in south Cocoa Beach, you have had 2 chances since 2003. No units have been offered since the last sale last summer.

One thing that is easy to predict is the rate of sales for the rest of the year. We are right at the peak time of year for condo sales and we can expect sales to decline from this point through the end of the year if recent years are an indication. Graph of sales so far this year over the last two years below.

Sellers; take note. If you don't have a contract yet and you'd like to sell this year, get aggressive and do your best to reach acceptance on any offer you receive. Recognize that it's very likely that your expectations are not realistic and that you may have to accept less than you thought. When I bring you an offer please consider it carefully. There are 671 condos currently offered on the Cocoa Beach and Cape Canaveral MLS and, if you are unwilling to accept the June 2009 reality, we'll move on to the next one.

No fashion error was ever made in black.
_______________Calvin Klein